I divested all 90,800 shares of Libra Group on the 04/11/2016 at $0.192, recognizing a small profit in the process. Libra was a tiny, non-core holding, and I wasn’t intending to spend time to write about it, but on hindsight, there are some take-home lessons to be gleaned from this.
So why did I sell out? Aside from general portfolio management reasons (I’m in the midst of cutting down my holdings yet further. I forsee TTI’s final portfolio to be ultra concentrated, with sizable, large positions in a few companies, pretty much in line with the change in my investing style since 2015), I think there are 3 key red flags that stand out.
To sidetrack a bit, I think the traditional Graham and Dodd’s “buy and hold” strategy has been over -cited, over-copied and generally misunderstood. Particularly for small and mid caps, and particularly so in the local SGX markets, I think investors have to monitor closely their holdings in such companies. Buy and hold is not really buy and hold and forget about it.
This is the reality of it.
Unfortunately, our small and mid caps here don’t get much scrutiny, unlike in the other major markets such as NYSE, HKSE or SSE.
This means that many instances of iffy behavior, while not necessarily bad at first glance, pretty much flies under the radar. In fact, Libra is so low profile that I think this post probably won’t get much interest.
Anyhow, I’ll highlight 3 red flags here, it’ll apply to pretty much all other micro, small and mid caps companies. Do note that my definition of “red flag” isn’t necessarily bad. It’s just… well, a red flag. Something that should make the serious investor sit up and take note, reassess the situation, and possibly act on it.
1. Diversification into unrelated industries
This is kinda self explanatory. Long time readers of SG TTI would’ve known by now, my gripe with companies that do this. For sure, there are some companies that can successfully do this: Berkshire is a mish mash collection of companies. In the local context, one can argue that Boustead is one such company too: Oil, Geospatial tech and Industrial real estate don’t really have that much in common.
I think the evidence is pretty clear that the companies that can successfully span across industries, all have 1 thing in common: Strong management that thinks like an investor/capital allocator.
It’s probably not a coincidence that the management team is always helmed by a single star, key man that can make big decisions unilaterally. I mean, truly successful investing at it’s purest form, is pretty much a solitary activity. It’s hard to do it in a consensus, round table way.
WB prob understands this, which is why Berkshire’s succession is structured in such a way that a few managers, each individually handle a portion of their gigantic capital. He didn’t structure it in such a way that everyone comes together, discuss, and eventually make investing decisions as a team. It’s just hard to do so. Not impossible, but very hard.
I have no doubt that the management of such successful companies, would do equally as well if they were not running a business, but running a hedge fund. Anyway, at that level, most of them run their business like a hedge fund really. The operations are left to other key management personnel, while their focus is on deploying capital successfully.
Another hint: Management of such companies tend to focus on certain metrics in their ARs. WB hawks Berkshire’s NAV more than anything else. FF Wong focuses on the FCF generation of the company. Both have spoke about the ROIC or ROA figures in their presentations. The vibe I get is that stuff like EPS itself isn’t quite as important as compared to other companies.
Back to Libra. Libra was initially a M&E business, focusing mainly on manufacture of air conditioning ducts, and the installation and maintenance of ventilation systems.
In April 2015, the company acquired Cyber Builders Pte Ltd, and eventually expanded their repertoire of services. The company could install fire alarms and protection systems, electrical systems and sanitary and plumbing systems.
With more acquisitions, the company eventually could undertake entire construction projects. On top of that, they worked on getting their Building and Construction Authority (BCA) licensing expanded, such that they could undertake projects of larger size.
For eg. in Feb 2016, a subsidiary, Kin Xin Engineering, got it’s BCA classification upgraded from L5 to L6, which allows the company to tender for projects of unlimited size.
All this is organic expansion. All great. TTI approves of it.
The first hint of going off the rails, came in July 2015:
Wow. Talk about diversification.
Suddenly, the company wants to expand to… everything. Man, this makes Tesla look like a dull company.
Property Development, Trading of construction materials, Hospitality (hotels), Tourism and even Aviation! Step aside Elon!
Needless to say, I was really disappointed to see this.
The company quickly followed up by announcing an acquisition of a Malaysian company, which gives Libra assess to 4 Boeing 737 aircraft:
The acquisition was announced in November 2015. Yet, then the company to be acquired was a completely new one, holding just the abovementioned aircraft in it’s books.
“The Target has only commenced operations in November 2015 and accordingly has
no past track record and no historical financial performance attributable to it as at 31 October 2015.”
Weird, isn’t it?
What is lesser known, is that the Chairman, Mr Chu Sau Ben, is also the Chairman of a privately owned, little known tourism company in Malaysia:
This can be a good thing, it can be a bad thing, it can be a non event. Investors would’ve to assess the deal on it’s own merit. For me, I didn’t like it one bit.
2. Key personnel starts pledging personal shares in the company
It gets worse. Mr Chu Sau Ben started pledging his personal shares in the company to various individuals, as collaterals to secure personal loans.
This is just 1 of the instances:
While it’s perfectly within the rights of Mr Chu Sau Ben to do whatever he wishes with his stake, I think shareholders have to view this as a potential red flag.
Why does Mr Chu need the personal loans? And more importantly, what are the loans used for?
In the US, there are companies where the executive did something similar, and unfortunately, the loans turn sour and the lender had to offload the shares in quick succession, resulting in a tremendous drop in share price, which triggered further margin calls, resulting in other shareholders having their stake sold off etc. You get the idea.
At the bare minimum, having all these transactions tells me the Chairman is at least partially occupied with some of his personal finances, possibly with other ventures or businesses, instead of focusing on Libra. And that’s not good.
3. Depleted order books
Red = completed
Yes. It’s all in red.
Incidentally, I saw one of Libra’s trucks parked by the road near my place recently, and stopped the car to chit chat with the driver. He basically gave me the impression that things have slowed down tremendously, and that he isn’t doing much of late. I wouldn’t want to get him into any sort of trouble, so I shan’t talk too much about this.
For construction companies, obviously the order books tell us a lot about forward earnings. So having 0 active projects, is obviously not a good sign for the coming results.
So, there’s my 3 red flag lesson for Libra. I’m glad, and probably very lucky in fact, to exit with a small profit. This is one company that I probably won’t be spending much resources following up on in the near future.